It’s hard to believe, but as recently as mid-July Netflix (NFLX) was a high-flying success story, with millions of satisfied customers, fast-growing revenue and profit, and a stock price at an all-time high.

Less than four months later, in one of Silicon Valley’s most astonishing reversals, customers are angry, the company is predicting losses next year and the stock is cratering. After falling 61 percent from their mid-July peak, the company’s shares plunged a stunning 28 percent in after-hours trading Monday after a surprisingly bearish financial forecast.

Netflix’s management has “destroyed this brand and the entire business faster than it took for me to return the ‘Godfather III’ DVD that’s sitting in my living room,” said Cody Willard, a former fund manager who still actively trades stocks and helps run a financial blog site called WallStreetAllStars.com. Added Willard, “I’ll get it shipped back, but I don’t think they’re going to get their business fixed.” Willard owns “calls” on Netflix stock, which give him the right but not the obligation to buy shares at a set price.

Netflix’s woes began with a sharp price hike, but worsened with the botched and then aborted spinoff of its DVD business and tone-deaf communications from Netflix management. Thanks to customer defections — and a much costlier-than-expected international expansion — a company that was known for outperforming Wall Street’s expectations is now forecasting much worse than expected results for next quarter and next year.

Subscriber drop-off

The company reported that it ended the third quarter with 23.8 million U.S. subscribers. Not only was that down from the 24.6 million subscribers the company had at the end of the last quarter, it was also below what the company itself had expected as recently as last month.

The subscriber drop-off was the fallout from the company’s series of missteps, Reed Hastings and David Wells, Netflix’s chief executive and chief financial officers, respectively, said in a letter to shareholders released Monday, adding that the primary cause of the subscriber decline was the price hike. That move, which raised prices by as much as 60 percent, hit customers who subscribed to both Netflix’s DVD and its streaming video services.

The new prices are “the right place for Netflix to be in the long term. What we misjudged was how quickly to move there,” Hastings and Wells said in their letter. “Many of our long-term members felt shocked by the pricing changes, and more of them have expressed that by canceling Netflix than we expected.”

Those cancellations will be particularly costly in the fourth quarter, they said. The company projected fourth-quarter earnings of $19 million to $37 million, or 36 cents to 70 cents a share, on sales ranging from $841 million to $875 million.

Wall Street analysts had previously forecast earnings for the fourth quarter of $1.08 a share on sales of $919.57 million.

The company also offered a seemingly contradictory subscriber forecast. In their letter, Hastings and Wells said Netflix expects its total number of “unique” U.S. subscribers to grow “slightly” in the fourth quarter. But the company declined to provide a specific projection.

Instead, the company offered guidance individually for its DVD and streaming video units. And those forecasts seem to imply a sharp decline in total subscribers.

At the end of the fourth quarter, Netflix expects to have some 20 million to 21.5 million U.S. subscribers to its streaming service, compared with 21.45 million at the end of the third quarter. The company also expects to have some 10.3 million to 11.3 million DVD subscribers, down from 13.93 million at the end of the just-completed period.

The company was not immediately available to comment.

The company did not give specific guidance on revenue and profits for next year, saying only that it now expected that the losses it expects to incur in the first half of next year while expanding its service to the United Kingdom and Ireland will be greater than its U.S. profits.

Revised forecasts

The reason that the stock is plunging is that based on Netflix’s track record, analysts and investors had been expecting the company to post profit growth next year and the year after that, said Michael Pachter, a financial analyst who covers the company for Wedbush Securities. The company’s new guidance means that it almost certainly won’t hit those targets, forcing analyst to revise their forecasts downward.

In grim news for the company’s shareholders, Patcher added: “I think it’s going down further than it did in the after-hours markets.”

Despite the negative aspects of its quarter, Netflix did top Wall Street expectations for the period.

The Los Gatos-based DVD rental and streaming video company earned $62.5 million, or $1.16 a share. That was up from the third quarter last year, when the company earned $38 million, or 70 cents a share.

Netflix’s sales grew 49 percent from last year’s third quarter to $821.8 million.

Analysts polled by Thomson Reuters had forecast earnings of 94 cents a share on sales of $811.59 million.

Contact Troy Wolverton at 408-840-4285. Follow him at Twitter.com/troywolv.

Troy Wolverton writes the Tech Files column and covers consumer technology as the personal technology columnist for the Bay Area News Group. Previously, he covered Apple and the consumer electronics industry. Earlier, he reported on technology, business and financial issues for TheStreet.com and CNET News.com.

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